Frontier Markets Equity Fund with Oliver Bell

OBJECTIVE

The objective is to give our clients exposure to global frontier markets.  These are the fastest growing economies, globally, which very few clients have any exposure to, and we think that this is also an area that’s very under researched, very inefficient markets that we can provide a compelling investment case for.

Frontier markets really start from Vietnam in the east all the way to Argentina in the west, taking most of Africa, most of the Middle East, and also about ten former Soviet Union countries.  For ease of definition, we define frontier countries as any country that is not classified as emerging market or developed market by MSCI.

EXPERIENCE AND RESOURCES

So I’ve been in an emerging market and developing markets teams for about 17 years, investing in those markets.  For 14 of those years I was at a company called Pictet Asset Management, where I ended up running the research team, and I’ve been at T. Rowe Price now for almost four years.

So I have multiple resources to hand.  I mean closest to me I have a dedicated team of analysts that do all the fundamental analysis of all the companies we invest in.  More broadly, they’re part of an emerging markets team, which is regionalised, and so we have analysts at each region that provide input again into my global portfolio.  And of course we’ve got the global platform of T. Rowe Price, which covers all the sectors and geographies around the world, and there are companies in many of these geographies that I can invest in, because they give me more than 50% exposure to the frontier countries.

And then there’s fixed income.  Of course, we have a team of dedicated analysts, macroeconomists that look at all the countries that I invest in, and I think of them as weather forecasters.  So it’s very important in these markets to understand if storm clouds are on the horizon, currency depreciations could be ahead of you, because you need to avoid those in order to outperform over the long run.

INVESTMENT PROCESS

So the benchmark we use is the MSCI Frontier Markets benchmark.  I only use it for one thing, and that is really when we find companies we like, we need to be overweight that company against the benchmark.  So at a stock level, you know, if it’s 1% in the benchmark that I need to be overweight, and that’s what drives the absolute weight of the companies we hold in the portfolio, the aggregate scores at a country or sector level are what they are after the outcome of that.

What we’re trying to get to is a basket of quality growing companies.  So finding growth in these countries is not that difficult, but finding companies that are managing that growth well over a long period of time is more difficult.  So what we do is we’re looking for any company that’s giving us exposure to any of these countries. They can be listed absolutely anywhere, so long as more than 50% of their earnings or their assets are based in these frontier countries.

What we’re looking for is companies we go on a long journey with, maybe ten years plus.  So if we get the right basket of quality growing companies, then hopefully we don’t have to exit at all. However, there are cases where the investment case that we’ve perceived or created doesn’t actually materialised or isn’t working out or we’ve been misled by management, corporate governance issues surface, anything like that would force us to come out.

So, as we think about top down and bottom up, the process that we deploy is very much bottom up.  We believe that the fundamentals of a company will outshine everything else over the very long term.  However, we have to be cognisant of the macro, because on a shorter term horizon then occasionally we can get sideswiped by very big sort of currency depreciations and that might mean that we have to reduce our weight in some countries at a certain time.

COMPETITIVE ADVANTAGE

Well, if you think about this asset class, it’s an asset class where the sell side or the investment banks put very limited resources into, because it’s very small and less profitable than their other areas of banking etc.  So by nature of that they have relatively junior or inexperienced analysts, and these analysts create the consensus that these markets do trade around.

So if we put higher calibre people into analysing these companies, getting to know these companies much better, visiting them more often, then we should be able to understand the fundamentals much much better than anybody else.  As a consequence, we think we can take advantage of these inefficiencies in the markets and outperform over the very long run.

I think at T. Rowe Price we deploy the right number of resources for the asset class.  The calibre of people we’ve hired in the team could equally be managing or analysing companies in the US, in Europe etc.  So we want to put the same fundamental analysis into what are very inefficient frontier markets, as you would if you were looking at Apple in the US, and I think at T. Rowe Price we’ve done that.  And then if you combine that with a very experienced portfolio manager, I think we have a very strong competitive advantage.

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